From the introduction of TReDS to the proposed Public Credit Registry, the RBI has taken several measures to address the credit gap in the MSME sector.
Key Highlights
- RBI had launched the TReDS platform for MSMEs to finance their invoices.
- The regulator has proposed a registry of borrower’s information to increase transparency in the system.
- A regulatory sandbox scheme was launched in 2019 for Fintech players to test their products.
Often ignored, delayed payments are one of the major problems that plague the MSME sector.
According to a primary survey conducted by the RBI in 2019, almost 44% of the MSMEs engaged in manufacturing activities faced the problem of delayed payments.
This often leads to a deprivation of working capital, in turn affecting the productivity of the MSME sector and hampering its growth prospects.
Adding to their woes, the predominantly informal nature of such enterprises further deprives them of formal credit, resulting in a double whammy.
To address this specific problem of the MSME sector, RBI in 2014 had launched the Trade Receivables Discounting System (TReDS) to help enterprises with timely cash for their working capital requirements. However, it could only operationalise in 2018.
It is an online platform for MSMEs to finance their trade receivables to address their cash flow problems.
Functioning as a payment system under the Payments and Settlement Systems Act, 2007, TReDS allows businesses to upload, discount, or settle their invoices or bills drawn against various entities, including corporates, Government Departments, Public Sector Undertakings (PSUs), etc.
To further promote the platform, the RBI brought the factoring transactions through the platform under Priority Sector Lending in 2016.
Currently, three entities namely Receivables Exchange of India Ltd. (RXIL), A. TReDS, and Mynd Solutions hold the license to operate the platform.
How TreDS works
Businesses can sell their invoices through the TReDS platform in the following way:
1. Suppliers first upload their invoices on a Trade Receivables Discounting System (TReDS) platform.
2. Once uploaded, the other party to the invoice/bill (the buyer) accepts the invoice through a Digital Signature.
3. Once accepted by the buyer, financiers on the platform bid for the invoice at discounted rates and the enterprise has the option to choose any of the bids based on their discretion.
4. Upon acceptance, the MSME enterprise signs a deed and receives the bid amount in its account.
In addition, an invoice could also be reverse-factored on the platform.
Thus, a buyer could upload an invoice on the TReDS platform and the financiers can bid on the invoice at discounted rates.
Once a bid is accepted by the buyer, a deed is signed with the supplier and the amount is credited to the supplier’s account.
Other Measures by the RBI for the MSME sector
While delayed payments are one of the major problems faced by MSMEs in India, the RBI is conscious of the credit gap existing in the MSME sector and has taken several measures over the years to iron out the regulatory inefficiencies.
Account Aggregators (AAs) play a very crucial part in addressing this problem. Registered with the RBI, AAs increase transparency in lending by transmitting credible borrower information from one financial institution to another.
Combined with the capabilities of OCEN, Account Aggregators can help reduce the credit gap existing in the MSME sector.
In addition, the RBI has also proposed a Public Credit Registry (PCR) as a repository of existing and new borrowers, helping financial institution gauge their creditworthiness efficiently.
Given that a CAFRAL report projects digital lending to overtake lending through traditional means, RBI, being conscious of the changing trend has introduced a regulatory sandbox scheme for Fintech players to test their products.
All these measures together are supposed to provide a conducive regulatory environment for increasing the penetration of formal credit in the economy.
